Aviation Refinancing: Timing, Tricks and Triggers

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1 AVIATION REFINANCING: TIMING, TRICKS AND TRIGGERS November 2016 Aviation Refinancing: Timing, Tricks and Triggers Organizations that use business aviation as part of regular operations benefit from the efficiency, convenience and freedom that aircraft provide. For instance, business aircraft utilize 10 times more airports than used by commercial airlines. With more than 5,000 public-use locations in the U.S., business aircraft owners have access to more locations with less flight traffic. In comparison, commercial airlines service only about 70 airports in the U.S. 1 Airports accessed by business aircraft Business aircraft reach 10 times more airports than those serviced by commercial airlines. Business Aircraft Commercial Airlines For those companies who have experience with business aviation, these benefits are already well-known. Yet, aircraft are complex assets to own with varying degrees of maintenance and types of operation in addition to the intricacies of aviation financing. To ensure your business aircraft continues to provide a return on investment while meeting your mission needs, it s critical to evaluate financing for the whole aircraft as well as upgrades. Member FDIC 1 Business Aviation Fact Book. National Business Association (NBAA). 2015

2 Evaluating Financing Opportunities At the time of your aircraft purchase, you probably thought about both the long-term advantages and the immediate impact it would have on business. Now that you have some time of ownership under your belt, you can reassess that investment to align it with where your company is today. Business opportunities, aircraft upgrades or modifications and operational efficiency are all reasons why current business aircraft owners consider aviation refinancing or cashing out equity. Whether you purchased your aircraft with cash or an aviation loan, many options exist to help maximize equity and borrowing power. When evaluating your aircraft financing goals, an important first step is to review available options and the different benefits they may provide. Cashing Out Equity Cash payment for a business aircraft purchase is not uncommon, particularly because it can allow for a quicker close, and some business owners prefer to carefully evaluate lending proposals without a transaction deadline looming. If you paid for your business aircraft with cash, those funds are now tied up in a non-liquid asset and can t be used for other business needs. If your business requires liquidity to expand, invest or implement advancements, leveraging your aircraft can be a good option. Using the equity in your aircraft to obtain aviation financing can provide you with funds to re-invest in your business, pay for operating expenses or make another large business purchase. This process is called cashing out, and it can be the right move for companies looking to loosen funds while retaining a valuable asset like an aircraft. However, the amount of financing you receive when cashing out aircraft equity will most likely not equal the total purchase price, depending on the type of aircraft, its age and its use. Keep that in mind when you consult with your aviation lender. Refinancing Benefits If your aircraft is already financed, you have several options to help you get the most out of your aircraft asset. If your aircraft financing is more than three years old, reevaluating and shopping for morecompetitive lending offers can let you take advantage of this economic climate. Additionally, refinancing can also provide the opportunity for you to reset the term, allowing you to lock-in a better rate for a longer term than what is remaining for your current loan. You may be able to negotiate better terms as well. Depending on the aircraft s history and the terms of your current loan agreement, relocating the aircraft loan to another aviation finance provider can also gain bargaining power for you. If your aircraft needs a few modifications or upgrades to increase efficiency or to comply with changing regulations, refinanced funds can be used to pay for those without pulling from your company s cash reserves. Whether you are seeking a longer loan term, lower monthly payments or upgrade assistance, refinancing can help. Carefully discuss these factors with your aviation tax and financing professionals. Direct Financing If you are considering replacing your current aircraft with a new or pre-owned aircraft, your aviation lender can customize solutions to fit your business needs. A replacement aircraft may be the right choice if your company is experiencing any of the following situations with your current aircraft. Company expansions where the current aircraft: Does not have enough capacity to carry all necessary employees Has a limited useful load that restricts your ability to travel with the people and inventory you need No longer has the range to satisfy your mission Page 2

3 Mission changes where the aircraft needs to: Fly further to accommodate your company s expanding footprint or client base Fly faster to reach your destinations in a timely and effective manner Meet client expectations of comfort when conducting business on board Business aircraft are a substantial investment and a critical tool, so businesses should consistently reevaluate usage and value to ensure the aircraft meets the organization s needs. Your mission specifics ultimately determine the range, speed, and special equipment required in your aircraft. Anything from employee additions to clients in new markets can be cause for an aviation review. Financing Considerations In addition to choosing the right financing option for you, several considerations should be kept in mind when assessing your business aircraft. A variety of factors can influence an aviation lender or broker, and it s important to be aware of how or if those factors affect financing. Aircraft Age The age of your aircraft is a significant factor when determining financing, and all financial institutions have different restrictions. In general, an aircraft can remain in use for several decades, but maintenance costs increase over its lifetime. Mandates can range from upgraded parts, specific timelines for replacements to be installed and avionics technology upgrades. If your aircraft has been in operation for less than 20 years, you may be able to effectively upgrade it to meet all maintenance and regulation requirements. Dave Higdon from AV Buyer, a website focused on aviation education and aircraft sales, Many operators prefer the economics of upgrading their existing aircraft, with options that deliver capabilities comparable or identical to gaining the abilities available with a newer aircraft purchase. When evaluating the pros and cons of upgrading over purchasing, carefully review the equipment you need rather than want. For instance, interior upgrades do not increase the dollar-for-dollar value or the longevity of the aircraft, although for some businesses client comfort and state-of-the-art technology are the keys to a successful on-board meeting. A balance between efficiency upgrades and amenities that enhance productivity is crucial. Keep in mind that lenders do not typically finance upgrades at 100 percent of cost, and lenders may finance older aircraft but with a higher down payment, a higher interest rate, and a shorter amortization period. If your aircraft is more than 20 years old, or has substantial required updates, it may be best to finance the purchase of a new or late-model aircraft. According to Business Jet Traveler, an aviation news resource, any aircraft older than 25 years would require costly and lengthy inspections and maintenance, which may be prohibitive for some businesses. Obtaining financing for this age-range of aircraft is difficult. Page 3

4 Newer aircraft whether straight from the manufacturer or pre-owned have the benefit of typically lower lifecycle costs. For instance, operations systems in aircraft built after 2000 use less fuel with quieter engines than those built in the 90s. When considering a purchase, you will need to evaluate how you will use the aircraft, your estimated monthly flight hours, and maintenance, hangar, crew and insurance costs, as well as other factors and expenses. Your mission and these costs should be reviewed with your aviation sales professional to find which aircraft best suits your needs and the purchase price you should target before beginning your aircraft search. experience. Don t limit yourself to the first lender you encounter; really dig into the details and ask the right questions. To prepare yourself for a productive discussion, outline your business-specific needs. Describe the age, type and maintenance status of the aircraft, how you ll operate it, the estimated hours per year you ll fly, and how long you plan to own the aircraft. Timing The timing of your aircraft purchase or refinancing can also have an impact on your bottom line. For instance, during the second half of the year business finances may be clearer, allowing you to make aircraft purchase decisions that provide tax advantages. Today, the historically low interest rates mean favorable financing deals abound. Fuel costs have also been steadily decreasing, which means it costs less to fly your aircraft. Regarding aircraft prices, it is a buyer s market for many models. These economic factors may make ownership a smart move for growing companies. If you have a business aircraft purchase on your company to-do list, it may be prudent to start shopping sooner rather than later. If you are looking to add locations, expand to a new region, increase your face-to-face client interaction or anything in between now may be a good time to consider replacing your aircraft of becoming an owner. And, simply because of the advance of technology, today s aircraft can outperform models from just a decade ago. The technology and efficiency inherent in the newest business aircraft have propelled business aviation to new levels. Working With Your Lender Choosing the right aviation lender can make a significant difference in your aircraft financing Page 4

5 Conversation Guide Below is a quick guide to help you navigate the initial conversation with the lender. The information provided should give you a good idea of what you need, and will ensure the lender is the right aviation partner. Do you charge any pre-pay penalties? Pre-pay penalties may occur when you attempt to pay the loan off earlier than the loan terms dictate. Clarify with your lender if pre-pay penalties apply to refinancing the aircraft, replacing the aircraft or paying off the debt with cash. Are you a broker outsourcing financing or is your company directly financing my business aircraft loan? Some brokers provide a service of searching for a lender for you, but this may add unnecessary fees. If it is a broker, ask how this person receives payment for this service. Will you retain this loan, or is there the possibility of debt sale? What documentation is needed to obtain credit approval? Keep close tabs on which items are required to obtain credit approval. Not providing timely or adequate information can slow the approval process. How long will it take to obtain credit approval? Credit approval timelines can range from one week to several weeks. Lenders occasionally sell off outstanding loans to other lending institutions, which may affect your loan terms or the service you re provided. Are there limitations to Part 135 aircraft usage for this aircraft or loan? If yes, are the limitations set by hour or percentage of use? Is a deposit required prior to credit approval, and is this deposit refundable if I m not approved? What are the closing costs and fees? It s a good idea to get an estimate of deposits, closing costs and fees before executing a term sheet and/or submitting a non-refundable deposit. Before finalizing a purchase or refinancing plan, check to see if there are any restrictions regarding charter use of the aircraft. Are there any leasing restrictions? Some business owners lease their aircraft for a period of time when the company is not using them. What is the closing timeline? Make sure you ask about the closing timeline. You will want prompt follow-up and detailed communication to ensure critical deadlines aren t missed by either party. Ask for a list of closing responsibilities as well. Page 5